There are plenty of reasons as to why traders should be bearish Treasuries but the most glaring being nearly non-existent interest rates and stabilizing currency and equity markets. Nonetheless, Treasury seasonals suggest the market could avoid any large selling until much later this fall. Also, although recent economic data has been better than the previous month's it is still generally below expectations and quite frankly, poor.

Similarly, it sounds as if a much larger than expected Greek tax hike could trigger another round of riots and protests. In the past, visions of Greeks in gas masks violently destroying property in Athens has been perpetually bullish for Treasuries. The thought process is that the unrest (and more importantly debt issues) will be contagious throughout Europe. In a world in which U.S. markets have been celebrating each positive headline out of Europe, a negative one such as this could quickly change the climate. For this reason, among others, we are taking a neutral stance over the next few sessions

For those of you that aren't aware, I spent a few weeks in Greece over the summer (ironically during the now infamous riots) and it is certainly vulnerable to some unrest. Without judging their culture or circumstances (which are challenged), I can' comment on facts. A majority of the Greek citizens don't pay, or pay very little, taxes, and many businesses practice aggressive tax avoidance techniques (such as cash only transactions under the table). On the other hand, entitlement programs are plentiful and so are governmental employee strikes (and yes this includes utilities and many forms of transportation). The point I am trying to make is the transition into austerity will not be an easy one and there could easily be negative headlines coming around the corner that could temporarily spook investors.

Yesterday we were looking for a move to 138'06 in the long bond and the mid 129's, for the most part we got it. However, tomorrow we see some risk of counter-trend Friday buying. Accordingly, we feel like the bears should lighten the load in hopes of "reloading" at better prices at some point in the near future.

We had a feeling the shorts would be feeling the pain this week as the market squeezed them into the September expiration; trade didn't disappoint.Except perhaps for those on the wrong side of things (possibly UBS rogue trader Kweka Adobili?).Just when it looked like the world was coming to an end, the December S&P rallied approximately 80 handles from the Monday morning lows to the Thursday night highs.

As good as the markets look, we have to approach tomorrow with caution simply because we are headed into what could be an eventful weekend in Europe.Also, markets are sadistic and have a tendency to behave in a manner that will inflict the most pain to the most traders and selling off after expiration would do just that.

As mentioned in yesterday's newsletter, quarterly futures expiration (early tomorrow morning) has a tendency to mark the short-term highs of a move.All of those traders holding short September e-mini S&P futures until the last minute could end up offsetting near the highs (hopefully, they have enough margin to roll into December).Similarly, short call traders that have suffered on the way up have simply run out of time.Watching the market pull back tomorrow or Monday would be torture, but that is exactly what has happened historically in similar situations.

Although we are neutral to bearish in the coming sessions, we still think the intermediate-term trend will continue to be up.If you are "long" the market with futures or options, we like the idea of lightening up, or taking profits completely, with the intention of trying to get in at better prices if seen.

In yesterday's newsletter we stated "...bears might look to enter trades near 1190 and then again near 1204 (more reliable)."The original resistance triggered a moderate pullback that should have worked well for aggressive day traders and the second resistance area was near the high of the day and occurred on the close.We still feel like it will act as valid resistance going into tomorrow's trade...look for a pullback (possibly) overnight, or more likely early tomorrow morning as the September contract drops off the board.Intraday support lies at 1188 and then again near 1174 in the December S&P future.

In a longer-term view, we feel like this move will eventually see 1224ish in the S&P, and possibly 1244.This would put the NASDAQ above 2300 and the Russell near 740.

Treasury futures move higher on options expiration

In today's world, bad news is good news...as long as it isn't "fall of the cliff" type of bad news. Many seemed to sigh in relief this morning on news that the GDP was revised lower to 1.0%. Six months ago this would have been tragic news, but the fact that it is still in positive territory was enough for today's standards. Similarly, the Michigan Sentiment was reported at 55.7 which is in the same ballpark of the late 2008 all-time low figures. Yet, again most viewed it as a positive sign that we didn't get a repeat of the Philly Fed (fall off the face of the earth) bombshell.

With chaos in Europe in a bit of a climax and Greek sovereign debt securities trading near all time high yields, Treasuries might not be done to the upside just yet...although we think bond bull's days are numbered.

On Friday' stocks and bonds moved up in tandem...perhaps both markets feel as though Bernanke's lack of action today will somehow lead to QE3 tomorrow. Or, stock traders took it (and ran with it) as a glass half full outlook from the Fed, while the bond traders are questioning the stability of the economy. They say the Treasury market is "smarter" than the stock market...I'm not sure I agree with that but I will say that participants seem to be a little more level headed most of the time.

Even if equities come in higher Monday morning, I'm not sure Treasuries will be willing to give back the day's gains and from a purely technical standpoint look poised to move higher regardless of what might be going on in other markets. After all, the calendar is chock full of scheduled reports and the news has been shaky at best. Also, Hurricane Irene isn't expected to be a game changer but that doesn't mean there won't be some uncomfortable investors allocating into safety for the short-term.

First notice day for the September Treasury futures is on Wednesday, you should be rolling into the December contract if you haven't already. A short squeeze in the December 30-year could mean a run to 139'09, and even 141'05 if things get out of hand. This is equivalent to 130'01 and 131'03. Look for sharp rallies to establish bearish trades...selling quiet markets can be a tough game.

As we expected, Bernanke did not deliver what the market (thought) it wanted...another round of stimulus. Also as we thought might be the case, after a knee-jerk reaction to the downside traders realized that if the Fed has enough confidence to let the markets stand on its own two feet (at least for now), maybe they should too. What we certainly didn't count on was this realization to occur so quickly!

If you've been following this newsletter, we had believed it would take a few days for all of this to play out and instead it took a few hours. The September e-mini S&P futures rallied from a low of 1132.75 to a high of 1178.75 in the span of 2 hours. Nonetheless, today's action and events look bullish to us.

In our opinion, Ben Bernanke was simply "kicking the can down the road". Doing so gives the market time to digest the upcoming economic data and hopefully discover things aren't quite as bad as the markets have lead people to believe. If the Fed chair felt the soft patch was extending into something more, he probably would have tried to head things off at the pass; instead he simply reminded investors the Fed would be there if needed and is willing to let previous stimulus work its way through the system.

Today's data wasn't a catastrophe, and that in itself was good news but next week brings a hefty load of news to digest. Traders will start the week with personal income and spending, and end the week with the employment report. In between, we will hear about home sales, home prices, Chicago manufacturing, the ISM index and more.

None of the stock indices quite reached the support levels we were eyeing coming into the session, but in the overall scheme of things they weren't far off and the fact that traders were happy to hold stocks over the weekend for the first time in weeks, we could be in store for some follow through buying. Barring any suddenly (or maybe not so suddenly) bearish economic data it feels like the market could easily break out of the current wedge pattern and made an attempt at a recovery.

A close above 1185 in the September S&P confirms a break-out and should lead to a melt higher that could reach the mid 1260's. Day traders can look for intraday resistance near 1185 and then again near 1203, intraday support lies at 1162 and then 1143.

Bearish activity in Treasury futures options!

There weren't any economic releases to guide trade, so it was all about Europe. Unfortunately, the Euro zone seems to have moved from a state of fear to a state of panic and once the global cycle of volatility gets started, it is difficult to turn the momentum around. European shares were down 2 to 4% for most of their session, triggering another wave of safe-haven buying. The long end of the Treasury curve, and gold, were the primary beneficiaries (despite a temporary bout of early morning profit taking).

Although it has become quite obvious simply by looking at charts, I thought I'd put some perspective on the safety trade. The markets have nominated the Swiss Franc, the Yen, gold and U.S. Treasuries as the place to park cash throughout the most recent wave of volatility. Stats suggest that the correlation coefficients for gold and the Franc vs. Treasuries is near 94! This doesn't offer any help with timing, but it is important to realize that extreme signs of correlation often mean markets are heading toward extremes. Naturally, this can go on for quite some time (you've all heard the mantra "markets can stay irrational longer than most can stay solvent"). When and where traders begin unloading positions in these overcrowded trades, it could be swift and unforgiving for those in the market's way.

We were a little surprised that the 30-year bond future wasn't able to print the 142 to 143 area last night while gold was printing 1880 and the S&P under 1120. Some might see this as a fatigued market and I would somewhat agree but also argue that the lack of panic in Treasuries while the sky was caving in on the equity market could leave some Treasury shorts overly complacent; in turn, one more short squeeze could be in order. However, a move to the 142/143 area could turn out to be a great opportunity for the long-term bears.

BTW, there was a lot of chatter surrounding large option market volumes in long puts, and put spreads...tops are hard to pick, but that doesn't stop people from trying.

Jackson Hole repeat for stock index futures?

Stock index futures continue to be plagued with massive volatility and what seems to be a "buyers strike". Despite several attempts at rallies, traders simply weren't willing to hold large equity positions into the weekend. Adding to market volatility was expiration of the August options.

The global financial markets have fallen into a vicious circle of bearishness that, once started, can be difficult to thwart. For instance, traders in the U.S. look at the European markets for guidance, if the indices are down significant across the pond domestic traders tend to be heavy handed. Similarly, Asian markets watch the U.S. session, and if they close lower it dramatically hinders the odds of a positive open there. Eurpeans, on the other hand...look to Asia. You can see how the phenomenon feeds on itself and can turn a normal market correction into a full-blown tragedy.

The slightly slower paced selling suggests that traders could be preparing for the infamous Fed backstop. The Federal Reserve has an uncanny ability to turn the market on a dime on news of the latest stimulus but with so few bullets left in the chamber, some wonder if this is even a possibility. Nonetheless, the bears haven't forgotten Bernanke's Jackson Hole speech that triggered a massive multi-month rally thanks to QE2. We doubt he'll have anything to say about a QE3, but he will likely attempt to come to the market's rescue. On a side note, there were some unsubstantiated rumors floating around in regards to an emergency Fed meeting over the weekend.

Being an optimist at heard, I can't help but feel as though the market will eventually work through its problems and recover. However, the near-term outlook is highly uncertain and we are probably in for more pain before things get better. Although we feel like current action is an attempt at a bottoming process, it seems the September S&P is destined for a retest of the 1100 area and maybe even the 1077 low. Look for support in the Russell near 620 and in the NASDAQ at 2007.

Treasury dilemma: Debt Crisis vs. Safety

Investors are seeking quality, but with talk of defaults and debt ceilings, Treasuries just aren't the stellar attraction of "fear money" they once were. At the trough of equity trade in Friday' session, the long bond was treading water near 126, which was a gain of less than a handle on the day. Although 25 ticks is respectable, it could have easily been twice that in a more panic stricken environment or one in which investors put more value into the premise of "return of capital" rather than "return on capital". In other words, the mentality of investors in 2011 is far calmer than that of 2010. Only time will tell if panic will begin to set in, or if cool heads will continue to guide trade.

It has been a dreadfully slow news week, and today was no exception. Unfortunately, next week won't be much better; aside from retail sales and PPI the market will be left to sulk over last weeks disastrous data. With this in mind, as well as the tendency for Treasuries to "go out with a bang" we have to lean toward at least one more new high before a reversal (yes, yesterday's trade fooled us a bit).

Seasonality in Treasuries suggests some near-term softness could be followed by a mid to late summer rally...and yes, this can happen regardless of fundamentals, debt ceilings or even Treasury credit downgrades. It is often the less obvious market forces that guide trade, while the masses focus on the obvious (remember, most people lose trading on leverage).

That said, we'd rather be bears than bulls for the time being. Ideally, we would be most comfortable looking lower from what we see as significant resistance levels of 127ish and 124'10 in the September bond and note, respectively. In the meantime, look for support in bond futures near 124'13 and in the note near 122'26.

Bears maul stock index futures bulls but will it last?

Yesterday's sharp short covering rally appeared to be the beginning of the end of the correction, but that theory proved to be inaccurate. After what has been one of the longest (but not the deepest) corrections in the last decade, the market was unable to stay in the green for longer than a session.

To the bears, this looks like absolute despair...and they are likely licking their chops. However, as a contrarian I have to say that although this move has been a bit deeper than I had originally anticipated I still feel like (at some point) the risk could be to the upside and not the down.

When stocks are rallying, all we read and hear about investing is to "wait for a pullback to get long" but when the market finally pulls back, it seems all we hear is "run for the hills". When equities slide it can be nearly impossible to pick a bottom, and it almost always goes further than "most" are anticipating...if it didn't there wouldn't be a challenge and the markets wouldn't work. Remember, for every winner there is a loser and unfortunately, we can't all win.

Now that a majority of the technical oscillators are "embedded", it becomes much more difficult to predict where the turn might occur. It seems the chatter is looking for about 1250 in the cash market S&P, which means we'll probably find a low moderately above that price or moderately below (simply because anything else would be "too easy"). Unfortunately, we won't know which (if either) until after the fact.

Yesterday we mentioned the possibility of a retest of the lows, but we weren't expecting a blow out of the lows. However, this is what we have to work with.

Although it was on our radar to sell puts in the S&P, the premium offered by the market simply wasn't worth the risk and we are pleased that we didn't force a trade. On the other hand, we are growing anxious to get in on the action. It looks like the September S&P could be headed for the mid to low 1250's (which puts the cash index about 6 handles higher) and possibly as low as 1235ish to 1240. Should the market decline to such levels we will be tempted to begin taking action on the long side of the market.

If you are holding bearish positions and sitting on large profits, we congratulate you but encourage you to hedge your bets, lighten up or simply lock in your profit and turn the computer off. Oversold markets can turn suddenly and violently, so why torture yourself by letting a great trade slip through your fingers?

Calls are cheap! If you want to buy a lottery ticket, we like the July S&P 1310 calls for about 7.5 in premium ($375 on an e-mini). 1310 is not out of the question in the next 30 days, we were just there last week!

Stock index futures set up for more short squeezing?

Suddenly financial news websites and business news television is focused on the lack of a recovery and today's data delivered even more bad news. Just when it seemed the housing market couldn't get any worse, it does.

Pending home sales dropped 11.6% after rising 5.1% last month despite historically low interest rates and ridiculously cheap real estate (at least in the part of the country that I reside). Also, personal income and spending data suggests that incomes are dropping but spending is dropping even more. Nonetheless, the public hasn't gotten the memo...the Michigan Sentiment suggested that confidence in the recovery has exploded along with tumbling gas prices and a nice 2011 run in equities.

It is easy to point out the reasons as to why the stock market might go down. In fact, if you've visited any of the trading blogs and forums lately you've likely noticed an abundance of hostile bears. Perhaps these are the same bears that lost money shorting from March of 2009 through today? Otherwise, I can't figure out where all of the frustration is coming from.

I included this in yesterday's newsletter but I think it is worth repeating:

I ran across this comment string on the Yahoo Finance page...On a simple and very short news story with the headline "Wall Street Bounces Back for a Second Day" most comments were unfriendly and decisively bearish. Here are a few of the tamer examples:

"You call 8 points on the dow a bounce back? More like treading water."

" i hate the tribe responsible for this folly"

" The only bounce on Wall Street going forward will be the checks we get for our 401Ks!"

"Wall Street Bounces Back for a Second Day. "Dead cat bounce, now closing lower. Pathetic."

" Yeah a 7 point bounce... we are all getting rich now.... This market will tank later this summer... Oh wait, I am wrong on this prediction as I forgot this is Summer of Recovery Take II.... LOL..."

" bucks is a bounce back ??!!!! ROTFLMAOL . Wait for the USA AND GREEK DEFAULTS"

There are more, but you get the idea. Being the contrarians that we are, we can't help but feel as though the overly confident bears could be forced to run for the hills in the coming sessions. The end of May is notoriously bullish for equities and it appears as though sentiment might have tipped a little too much to the bear camp and trading just isn't that easy.

Ironically, these people alone make me think the market simply isn't ready to go down yet. Markets don't go down just because "everybody" thinks they should or will, they do it after the bears have given up and the bulls are complacently lacking attention. Also, we are in an environment in which weak economic news doesn't necessarily mean lower stocks. In fact, some speculators take it as a sign of more government intervention and, therefore, market support.

Another factor favoring continued strength in the S&P over the next week, or maybe even two, is a strong bullish tendency in late May that continues into the first week of June. We aren't suggesting it will be off to the races but we do think the June S&P futures could easily see somewhere in the ballpark of 1360ish before possibly turning back around. In the meantime, look for support areas near 1320 through 1316ish.

If we are right about the S&P, the Russell could see 860 and the NASDAQ future above 2400.

Bonds and notes rallied moderately sharply in the face of higher equities and lower safe havens (greenback and gold). There seems to be a transformation in market psychology and more importantly psychology. In the coming days we will know if the timid trade in Treasuries or the risk on trade was the right call.

In the short-run, we have to lean toward some sort of intermediate term top in bonds and notes. The economic recovery is more like Swiss cheese than a building block for the future but that isn't a surprise. The markets have been operating with this knowledge for months (even years) so it doesn't make sense to assume we'll see a sudden influx of fixed income buying at pathetically low rates of interest without some sort of shoe dropping in Europe.

In economic news, the second estimate of GDP was a little weaker than most were expecting at a growth rate of 1.8% but again...nothing shocking here. Similarly, initial claims for weekly jobless claims moved up to 424,000.

The Treasury issued $29 Billion in 7-year notes to an eager group of buyers. The yield came in at 2.429% and the bid to cover a healthy 3.24. The news enabled bonds and notes to turn positive and that seemed to trigger rather swift short covering.

COT data in recent weeks suggests large speculators (smart money?) are adding to short positions in the 10-year note and small speculators are gradually covering their shorts. They might be running out of margin, money or both but it is the small spec category that tends to be getting out when it should be getting in and vice versa.

We've been calling for this move to see the mid 126's in the June 30-year bond future and near (or maybe a little above) 124 in the June 10-year note. At the time of this writing, prices were getting near our targets...accordingly, we will be monitoring trade tomorrow and looking for a possible bearish opportunity.

Stock indices "iffy" at these levels

Option expiration Friday in the stock indices and Treasuries, made for a relatively volatile intraday session. Some of the weakness is being attributed to slides in clothing retailers that have suffered at the hands of a volatile cotton market but a more likely culprit is the fresh S&P downgrade of Greece debt. It wasn't new, or unexpected, but the news seemed to give currency traders reason to begin dumping the euro again, and stocks quickly followed suit. However, as is typically the case the initial panicked move later stabilized and losses in both markets were paired.

In regards to clothing retailers, today's concern was centered primarily around GAP. However, I question whether GAP truly is a barometer of the industry...unfortunately, they aren't at the top of the food chain like they used to be. Their issues with higher cotton prices are probably more the result of deep discounts on merchandise due to lacking demand, than anything fundamentally wrong with the business. Further, cotton prices have dropped sharply in recent months making this relatively old news.

Yesterday's economic data was weak, but excitement over IPO (LinkedIn) and merger and acquisition news kept a floor under pricing. Although the chart looks relatively neutral to bullish from this juncture...something doesn't seem right. It seems as though the Euro is at risk of at least one more large slide to the 1.3900 area...if so, stocks could follow. Accordingly, we will wait to see what plays out with the intention of possibly being bullish on a large slide (if it happens).

If the slide occurs, support in the June S&P lies at 1316 and then again just under 1300. If you are trading the Russell, it's a little trickier...levels are 812, 792 and 770ish.

If you are day trading, look for resistance in the S&P near 1346 and then again at 1352, support comes in 1330 and 1322.

New highs in Treasuries?

Option expiration in Treasuries and equities likely contributed to today's trade. Although, it is difficult to say whether it capped what could have potentially been a much larger rally in bonds and notes, or it actually held prices stable. Our gut tells us that it is the former.

Gold and silver rallied sharply as flight to quality buyers scrambled to react to a free falling Euro and Middle East protests. Although the traditional relationship suggests that gold and the Euro would move together, new debt realizations triggered safe-haven buying. I guess some have already forgotten that the purchase of metals is speculative and might turn a nice profit, but it is in no way a safety play. Nonetheless, people are creatures of habit.

It was a painfully quiet news day. There weren't any releases during the session and there won't be anything of substance to chew on (from a data stand point) until Wednesday of next week. In the meantime, it feels like trade will be dominated by overseas development (specifically the Euro zone debt debacle) and currency trade (although the two are related).

We aren't putting too much credence into Friday's trade due to the fact that it is the end of the trading week and option expiration. So we will rely on Thursday's price action for guidance...accordingly, it seems as though the Treasury correction (although a bit more shallow than we had expected) might quickly have run its course. The odds look to be favoring another run at new highs.

Our target lows of 123'14 and 121'20 weren't quite met, but were within the vicinity. Therefore, clients of ours were recommended to offset short Bond calls yesterday morning on the large dip to lock in a profit. We hope to have an opportunity to resell them at a better price in the coming week or so. Fills were coming back near 11 ticks. Depending on entry this yielded a profit of anywhere from $280 per contract before transaction costs to about $200.

If we are right about the Treasury rebound, the rally could see 126'09 in the June Bond futures and 123'16 in the June note.

Is the stock index futures putting in blow-off high?

* Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data. However, market analysis and commentary does. Charts provided by Track 'n Trade, Gecko software.

**Seasonality is already factored into current prices, any references to such does not indicate future market action.

Please note: e-mini S&P and e-mini NASDAQ chart are used because they better for charting purposes, but trade recommendations can be applied to either the full-sized S&P or the mini. Unless otherwise noted, profit and loss will be based on the mini version.

It is difficult to be bearish equities in the face of a runaway market. Despite statistics that suggested stock fund managers tend to liquidate holdings in late March and a mid month dip that some believed would yield windfall profits for the shorts, blue chip stocks had the best quarter since 1998.

There are plenty of reasons for stocks to sell off, but that doesn't mean they will right away. Higher crude oil, continued unrest in the Middle East and European debt woes will eventually come back into the headlines. However, in the meantime we seem to be in the middle of a short squeeze that could have a little room to run.

Consensus estimates are calling for about 185,000 jobs added last month based on the government data to be released tomorrow but the market is probably pricing in a little higher. That said, we are due for an upside surprise and if so it could be the perfect storm for the infamous last hoorah rally before going into correction mode.

From yesterday, but still equally important:

However, April isn't the month to become overly bullish. History suggests that it is one of the best months of the year to be long. For instance, according to our sources, since 1950 through 2010 there have been 42 positive April's and 19 negative. This is a nearly 70% track record with average gains of about 1.5%. In pre-election years, the numbers are even more impressive at 14 gainers to 1 loser with an average gain of about 3.6%.

In the coming days, be on the lookout for a "capitulation" buying move that brings the June S&P into the 1340's as an opportunity to get bearish. If you are the type that is anxious to get in...there is some resistance at 1333 and this could be considered a place for aggressive traders to nibble on the short side.

Our original target in the Russell was 840, but given the fact that small caps of out-paced the S&P we now think the odds favor a little higher. Consistent trade above 840 suggests 857 could be on tap. However, we have doubts to the market's ability to hold gains to the noted level without some digestion.

If you are a day trader, fading the news can sometimes be the best trade. Like my friend (I wish) Warren Buffet says, "Be greedy when others are fearful and fearful when other s are greedy."

Treasury futures on hold for non-farm payrolls

* Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data. However, market analysis and commentary does. Charts provided by Track 'n Trade, Gecko software.

March 25, 2011

*All rights reserved. Reproduction or distribution of this newsletter without prior consent is strictly prohibited.

March 25, 2011

Follow me on Twitter @carleygarner!

Stock index futures climb the wall of worry

A higher GDP revision, stable crude oil futures and a lack of any compelling headlines encouraged continued short covering ahead of the weekend. Market mentality is a far cry from what it was just a few weeks ago when traders were reluctant to be long over the weekend, and most speculators (it seemed) wanted to be short the market. We have now gotten back to the "buy on dips" price action and it feels as though this move has a little room to run.

Keep in mind that equity market seasonal patterns are calling for a late March downturn as funds liquidate holdings for end of the quarter statements. With this in mind, it doesn't make sense to get overly bullish but we do think there will be higher prices before any "real" selling comes in.

Treasury futures on hold

Mixed economic data lead to a relatively mixed session, but selling across Treasuries did show up in afternoon trade. The government's third stab at fourth quarter GDP came in at a respectable growth rate of 3.1%. On the other hand, Michigan Sentiment was reported at a slightly lower than expected 67.5. However, as we all know...it is what consumers do that matters, not necessarily what they say.

For the second time this week, selling in Treasuries was triggered by comments made by a regional Fed President. Today, it was Philly's Plosser who proposed "..raising rates and shrinking the balance sheet...".

It is getting harder and harder to argue the benefits of low yielding, fixed income securities. Higher equities, lower gold and "stable" commodities ("stable" inflation) all seem to be reasons to look for lower Treasury prices. None-the-less, the market has fallen a long way since last week's panicked rally and could be nearing support.

Earlier this week, we were looking for a 1,2,3 top to occur, which would have meant one more run at the highs before turning over and the market did just that. Unfortunately, it wasn't easy to identify until after the fact. Our charts were showing such a rally would have reached the mid 122's but we now know the quick run to 122'08 was all the market had in it. This leaves us feeling uncertain about the near term direction and looking for a clearer signal.

That said, seasonal tendencies suggest overall weakness in the coming weeks but buyers tend to show up in late April. With this in mind, we feel like the best trade will be from the short side..ideally from better levels, if possible. We see support in the 30-year bond just over 120 and 119ish in the note. If these levels hold, the bounce could finally see the mid 122's in the long bond (121'08 in the note). If so, we'd have to lean lower. On the flip side, if there is no bounce...the June 30-year could trade back to 118, at which time we might not mind being temporarily bullish.

February 25, 2011

*All rights reserved. Reproduction or distribution of this newsletter without prior consent is strictly prohibited.

February 25, 2011

Click hereto register for DeCarley's next webinar, Getting Started in Option Selling part II!

Buy Carley Garner's Books and DVD's on TradersLibrary.com!!

The stock market has made an art out of "blink and you miss it" corrections. Although we had originally thought the dip would extend into the mid-to-high 1270's in the S&P, we've now come to the conclusion that the low 1290's could have been "it". From here it seems the stock indices are poised to make new 2011 highs.

As mentioned in yesterday's newsletter, the equity markets are being held hostage by the Middle East and more specifically, crude oil.

Excerpt from recent newsletters (just in case you missed it):

Trade in the stock index futures will be highly dependent on events in the Middle East and their effects on crude oil. As dramatic as the crude rally has been, the market seems to be pricing in a lot of "what if's" rather than reality. This doesn't mean further deterioration of the situation can't occur, but it implies that the market is bracing for the worst and could be vulnerable to disappointment. Keep in mind that Libya produced approximately 1.7 million barrels of crude per day, and so far production has declined to about 700,000 barrels. However, the U.S. imported only about 51,000 barrels per day from Libya and this accounts for less than 1% of total crude imports. Also, the International Energy Agency and Saudi Arabia have pledged to cover any shortfall in supply resulting from ceased operations in Libya. In other words, don't get caught in the hype just yet...

It appears as though oil prices "might" have seen a key reversal; if so, the equity markets may be finding support sooner than many had thought. In stark contrast to the ideal held by traders in much of 2010 in which it is believed that higher oil, meant higher oil stocks and therefore higher stock indices; traders are now assuming higher energy prices will choke the recovery. In other words, the correlation has gone from positive to negative and a pullback in crude oil could trigger "bargain" hunting in equities.

There are other analysts with this view; according to Jim McDonald of Northern Trust in Chicago, "If we see oil prices normalize back down to where they were at the end of the year because of increased stability in the Middle east, that would be constructive to global growth and investors would love that."

Monday's tend to be bullish days for the equity markets, and we doubt that the upcoming session will be any different. Despite a temporary scare, we think the bulls will be reloading (assuming a lack of event risk over the weekend and stable crude oil prices). If we are right, the S&P could see prices as high as 1350 in the coming week or so. Similarly, the Russell could see 844 and the NASDAQ 2423.

Ceiling in Treasury futures could get punctured!

As mentioned in yesterday's newsletter, stocks and bonds can travel higher together as asset prices of all types are being inflated by the Treasuries cash injections. In today's session, that was exactly what occurred...although the buying in each market is being attributed to different factors and were at differing paces.

The buying pressure across bonds and notes was moderate at best, but in the face of a sharp equity rally it suggests the bias in the near-term will be higher regardless of action in other markets and maybe even the technical resistance overhead.

In today's news, the government's second estimate of fourth quarter growth was reported to be 2.8%. Most were expecting a figure closer to the previous reading of 3.2%. Not a bombshell, but a reason to keep fixed-income products in a portfolio. On the other hand, the final reading of the Michigan Sentiment consumer confidence index landed at a better than expected 77.5.

Seasonal tendencies in Treasuries suggest there could be a temporary rally, but the month of March tends to be a weak one. Therefore, we are looking for a place to be a bearish but feel like there will be better opportunities...especially on the short end of the curve.

First notice day is Monday, so you should be out of all of the March futures by now and into June. We see resistance in the June 30-year bond futures from 120 to 120'15ish but it "feels" like stops could be run. If so, we can't rule out a quick run to the mid to high 123's. In the 10-year note, we see resistance near 120 but we think closer to 121 is probable.

February 7, 2011

Come join optionsXpress host Jim Rouzan and special guest Ross L. Beck for part II a three-part series on the Gartley Trading Method. Part II is entitled "The Gartley Trading Method: Exits and Money Management." This series is based on Ross’ new book The Gartley Trading Method: New Techniques to Profit from the Markets Most Powerful Formation. Part III will be presented on March 7th. This is an event that you will not want to miss! To register for Part II of the series, click here.